Used goods trade

A growth opportunity

Peter Czaga and Barbara Fliess, OECD Trade Directorate

Ever feel like selling authentic used US baseball jackets abroad, or setting up a global business in second-hand German cars? The market opportunities may be more restricted than you think, and not necessarily because of quality.

International trade is not only about new products. A wide variety of used or refurbished consumer and capital goods are also sold on international markets, from old cars and turbines to spare parts, mobile phones and airplanes. Most used goods are sold by developed countries to developing ones.

But the market would be much bigger, if it were not for some key trade restrictions that have curiously been overlooked in recent global trade rounds. This should be changed. Consider the case of used cars. For a start, the average car has more than one owner over its lifetime – the used-car market is clearly much bigger than the new-car market. Bulgaria, Cyprus, Jamaica, New Zealand and Russia are just some of the many countries where imported used cars account for the lion’s share of national car sales. The magnitude of international trade can be appreciated from the fact that, excluding trade with Canada, the US exported approximately one third as many used automobiles as new automobiles in 1999. Japan, which is another major exporter of used cars, was estimated to have shipped abroad a record US$1 billion in used vehicles in 2003.

In many countries there are also major sales opportunities for remanufactured and used motor vehicle parts and components. The market has been estimated at about $60-70 billion in sales worldwide, as people on lower incomes in particular keep their vehicles running for as long as they can to avoid the expense of purchasing another one.

Another major global market is second-hand clothing which, like used automobiles, could grow much bigger. World exports in used clothing amounted to $990 million in 2001, a small fraction of the export of new clothing, valued at $146 billion. However, this trade is more than it seems, because the relative weight value of second-hand clothing is very small, at just $0.73 per kilogram.

The trouble with the used goods trade is that, just as with new products, many countries have put up high barriers against them, not because they have anything against second-hand items as such, but often simply to protect local manufacturers and salespeople of new and used goods from outside competition. The products most commonly affected are automotive vehicles and parts, machinery, clothing and medical devices.

A recent review by the OECD of trade policy data for 85 member countries of the World Trade Organisation found that almost one third of them impose some kind of prohibition on the importation of one or more categories of used goods (see table). Other countries use licensing requirements, special tariff rates or other less-interventionist measures to regulate imports. Countries in Latin America, Africa, and Asia, including major players like Brazil, China and India, are the leading users of restrictions in this area.

International trade in used motor vehicles is particularly often subject to trade restrictions. According to work by Danilo Pelletiere and Kenneth A. Reinert of George Mason University, only 58 out of 132 countries surveyed have no import restrictions in place. Twenty-one countries ban importation outright and the remaining countries apply a combination of less restrictive measures, such as conditional import bans (usually related to age or other technical requirements) or special taxes and charges. Many, predominantly developing, countries also restrict the import of used or remanufactured or rebuilt vehicle parts and tyres. Prohibition is common particularly among Latin American and African countries, although it exists in some Asian and east European countries as well.

Trade restrictions also abound for secondhand clothing. There are import prohibitions in place, mostly in African countries and in some low-income Asian and Latin American countries, as well as in China. Their governments usually cite health and sanitary reasons for these measures. South Africa permits the entry of used clothing only if it is for humanitarian donations.

Brazil, Pakistan and other countries, again mainly in Asia and Latin America, impose conditional bans on the importation of used machinery, for safety and environmental reasons. Outright bans are rare; instead, most countries demand that the goods in question meet strict technical standards. Finally, some countries do not permit importation of certain other categories of products, such as used medical devices; China, Egypt, Kuwait, Syria and Thailand reportedly apply unconditional import bans. Such bans are also common for electronic appliances, refrigerators, air conditioners and compressors.

Costs and benefits

Some of the arguments to keep out used goods can be challenged under international trade rules, though health or environmental reasons are tricky, and some are legitimate.

Consumers may well clamour for used goods: they are cheaper and often perfectly reusable. Indeed, access to used machinery may be the determining factor in investment decisions by firms in developing countries with skill constraints.

But used goods are seldom covered by warranties and they can carry risks and costs. For example, defective or hazardous products can be exported to countries that lack the regulatory framework needed to protect users against them, so rather than sort through the goods, it simply becomes easier to ban them outright.

Otherwise, it is questionable whether used goods should be treated differently to new ones for trade purposes. And even where safety is an issue, old goods could be subject to the same rigorous testing standards that new goods are required to meet. Even environmental arguments may not be watertight. Research suggests that used vehicles from developed countries often meet higher environmental and safety standards than a developing country’s local fleet of (still older) vehicles. The recycling and re-use of clothing and auto parts helps save scarce natural resources and, as long as the goods are not dangerous or toxic, stretching the lifespan of old products is on balance good environmental policy.

Used goods are obviously problematic, since they are, after all, used. But outright prohibition of importation may not be necessary if the policy goals behind these bans can be reached by other, less trade restrictive, means.

In other words, controls and oversight could be stepped up, and technical inspection carried out at specified intervals, but trade itself would continue. That surely would bring trade benefits in the longer run. Also, some of the more complex control functions could be shared with the exporting countries, which tend to have more developed regulatory infrastructure. For high-risk used or refurbished goods, exporters could perform quality control as part of their own trading procedures.

What’s more, the used goods market could lean on internationally recognised standards already in place to build its own appropriate standards. An important step in this direction occurred in 2004 when the International Organisation for Standardisation (ISO) endorsed a plan for developing international standards intended to ensure that second-hand goods meet agreed health and safety standards, and that consumers have access to the necessary product data to make informed purchasing decisions. The development of such standards, coupled with capacity building enabling all countries to use them effectively, should provide an opportunity for countries to review and liberalise their existing trade policies.

But while used goods trade should be liberalised, that does not mean a free-for all. On the contrary, better oversight would reduce the fraud already affecting the used goods sector. The bottom line is, the crude import bans in place in many countries are unable to achieve their goals. Easing restrictions and lifting bans in a coordinated way will help boost welfare and development. Used the goods may be, but with trade, they become very useful indeed.

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